China's Unconventional Nationwide Co2 Emissions Trading System: The Wide-Ranging Impacts of an Implicit Output Subsidy

54 Pages Posted: 9 Dec 2019 Last revised: 4 Jan 2025

See all articles by Lawrence H. Goulder

Lawrence H. Goulder

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

Xianling Long

Stanford University

Jieyi Lu

Yale University - Yale School of Forestry & Environmental Science

Richard D. Morgenstern

Resources for the Future

Date Written: December 2019

Abstract

China is planning to implement the largest CO2 emissions trading system in the world. To reduce emissions, the system will be a tradable performance standard (TPS), an emissions pricing mechanism that differs significantly from the emissions pricing instruments used in other countries, such as cap and trade (C&T) and a carbon tax. We employ matching analytically and numerically solved models to assess the cost-effectiveness and distributional impacts of China’s forthcoming TPS for achieving CO2 emissions reductions from the power sector.We find that the TPS’s implicit subsidy to electricity output has wide-ranging consequences for both cost-effectiveness and distribution. In terms of cost-effectiveness, the subsidy disadvantages the TPS relative to C&T by causing power plants to make less efficient use of output-reduction as a way of reducing emissions (indeed, it induces some generators to increase output) and by limiting the cost-reducing potential of allowance trading. In our central case simulations, TPS’s overall costs are about 47 percent higher than under C&T. At the same time, the TPS has distribution-related attractions. Through the use of multiple benchmarks (maximal emission-output ratios consistent with compliance), it can serve distributional objectives. And because it yields smaller increases in electricity prices than a comparable C&T system, it implies less international emissions leakage.

Suggested Citation

Goulder, Lawrence H. and Long, Xianling and Lu, Jieyi and Morgenstern, Richard D., China's Unconventional Nationwide Co2 Emissions Trading System: The Wide-Ranging Impacts of an Implicit Output Subsidy (December 2019). NBER Working Paper No. w26537, Available at SSRN: https://ssrn.com/abstract=3500655

Lawrence H. Goulder (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-723-3706 (Phone)
650-725-5702 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Resources for the Future

1616 P Street, NW
Washington, DC 20036
United States

Xianling Long

Stanford University ( email )

Stanford, CA 94305
United States

Jieyi Lu

Yale University - Yale School of Forestry & Environmental Science ( email )

New Haven, CT 06520
United States

Richard D. Morgenstern

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
56
Abstract Views
462
Rank
750,039
PlumX Metrics